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The True Cost of Nonprofit Ethical Failures

Tissue sample (AP Photo/Daniel Maurer).

Tissue sample (AP Photo/Daniel Maurer).

Joan Harrington

Nonprofit ethical failures can be extraordinarily harmful to the organization’s stakeholders as well as corrosive to the entire social sector. Usually the scandals are discovered and covered by the press, but the damage resulting from the unethical behavior is often much broader and deeper than usual news coverage allows. Recent scandals at Memorial Sloan-Kettering provide a painful illustration of the damages wrought by unethical behavior at a nonprofit.

Memorial Sloan-Kettering Cancer Center has had four recent ethical failures, each with conflicts of interest at the core. The chief medical officer failed to disclose significant financial relationships with pharmaceutical and other medical companies related to his research. He resigned. The chief executive of MSK received $300,000 for serving as a board member to the drug company, Merck. This was in addition to his 2016 compensation package of about $6.7 million from the hospital. He has resigned from his board position with Merck. A hospital vice-president, as compensation for representing MSK on the board of a newly public company, held an almost $1.4 million stake in the company. The vice-president has now turned over that stake to the hospital. A group of insiders, including both board members and high-level employees, founded an artificial intelligence start-up, making a deal with MSK to grant the new company an exclusive license to 25 million tissue samples collected by MSK. The chair of the pathology department has stated his intention to divest his shares.  

Looking at the circumstances around the funding of the for-profit artificial intelligence company using MSK tissue samples illustrates the breadth and depth of the damage from one example of unethical behavior. By way of background, the for-profit company, Paige.AI, was founded by two key employees of the hospital and the chair of the executive committee, and all had equity in the company. Three members of the board of directors invested in the company. The employees were the chair of the pathology department and the director of computational pathology. The hospital granted to Paige.AI exclusive rights to 25 million patient tissue samples, “one of the world’s largest tumor pathology archives, spanning six decades,” according to Businesswire. The compensation to the hospital is a 9 percent ownership share of the new company.

Nonprofit law, and ethics and accountability standards address this kind of insider deal, requiring data, analysis, and protection for the nonprofit that did not happen in this case. Stated simply, board members and employees are required to act in the best interest of the nonprofit. Following this rule would likely have prevented the harm that has befallen MSK and its stakeholders.

Who has been injured and how?

Patients

The tissue samples given under the license to Paige.AI were from MSK patients.  Some of these patients and their families are concerned about the tissue being used by a for-profit company, arguing that the consent they gave for use of the tissue was for the public good, not for individual profit. Their trust in the nonprofit hospital that treated them or their family members has been eroded, and that may well extend to other aspects of their health care.

In addition, some patients and family members are concerned about commercialization and loss of privacy. In an article, “Memorial Sloan Kettering, you’ve betrayed my trust,” Steven Petrow, writes:

Are the slides of my cancer among them? My mom’s? My sister’s? I’m uneasy wondering whether they are being commercialized without our consent, or even without our being notified. The hospital claims that the data are anonymous, but anonymous data these days has a habit of somehow becoming identifiable. Data are the currency with the greatest value in research today.

Employees

The department of pathology did the work in collecting and analyzing the 25 million slides over many years. Current hospital pathologists voiced anger that their work was sold to a for-profit company, allowing substantial private gain for a few. Because the deal was not widely discussed before it happened, these employees did not have an opportunity to voice their concerns. The chair of the pathology department was one of the employees who founded and received an equity stake in the new company.  He has since announced that he would divest his stake.

Other employees have voiced their concerns about the state of affairs at MSK, and some physicians raised the possibility of a vote of no confidence for the hospital’s leadership. Confidence in the board of directors, the body ultimately responsible for the health of the nonprofit, is low. This turmoil damages the employee – employer relationship and ultimately the institution itself, and it can take years for confidence to be restored.

The greater community

The loss of confidence in leadership, in both management and the board of directors, has an impact beyond employees. The many people who interact with the hospital including future clients, donors, partners in research and business, and participants in community outreach programs may pause before becoming affiliated with the hospital. This may cause harm to all parties.

MSK and its mission

Paige.AI’s exclusive license gives it the right to use an enormously significant pathology archive. No one obtained an independent valuation of the tissue, and other potential interested parties, such as Google and Microsoft, were not given an opportunity to bid or compete for the asset. The actual value of the exclusive license is unknown and may well be more than a 9 percent ownership stake in a new commercial enterprise whose success is uncertain and over which MSK has no control. The hospital did not take the appropriate steps to ensure the maximum return for this valuable asset, damaging the hospital and its ability to pursue its mission.

One could also argue that MSK limited their ability to accomplish their broader goal of battling cancer. Progress on cancer research may actually be slowed by the Paige.AI deal because access by multiple parties is blocked by the exclusive nature of the license. To maximize the public benefit of its data, MSK could have made the data freely available or at least available to multiple researchers. At the very least, this possibility should have been fully vetted by management and the board with the help of outside experts before making the decision to issue an exclusive license to a for-profit company.

Past donors

Past donors – individuals, corporations, foundations, the government – are all “investors” of a sort in the nonprofit and work on pursuing its mission. Their reasonable expectation would be that an asset of the nonprofit, which in some small way they all contributed to, would be fully valued and used to help the nonprofit pursue its mission. They would expect that the directors and employees would act only in the best interest of the hospital in furtherance of its mission.

The social sector

When these scandals occur, there is an erosion of trust in nonprofits, a suspicion about their integrity, effectiveness, and professionalism. And part of this is because of real harm done to the public. The public effectively subsidizes tax-exempt organizations. We pay more taxes to make up for money not contributed by tax-exempt organizations. We do so with the understanding that these organizations will maximize their contribution to the public good. Yet the hospital agreed to a deal benefiting private individuals related to the hospital.  In doing so, it likely undervalued the compensation the nonprofit should have received in the deal. 

This erosion of trust affects donor giving. A recent survey  by MissionBox about the impact of multiple nonprofit scandals predicts such a reduction in giving in 2018.

The steady stream of nonprofit and charity scandals has the potential for a significant drop in activity from traditionally generous donors. Nearly 60 percent of survey participants indicated they will be giving less in 2018, a reduction directly influenced by news of nonprofit and charity scandals related to financial malfeasance or exploitation of charitable contributions.

Reduced giving hurts all nonprofits and their clients.  

MSK’s ethical lapses may seem mild in comparison to charges of sexual abuse, lavish spending, or fraud, all of which have been raised in the social sector in the past few years.  But the damage to the hospital, its stakeholders, and other nonprofits is real and long-lasting -- and it was completely preventable.

Oct 29, 2018

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